HMRC SDLT: SDLTM18795 – Term of a lease: Renunciation of existing lease and grant of new lease to increase the term and/or increase the rent: Example 3
Principles and Concepts of Lease Renunciation and Grant
This section of the HMRC internal manual provides guidance on the renunciation of an existing lease and the grant of a new lease, specifically focusing on increasing the lease term and/or rent. Example 3 illustrates these principles in practice.
- Renunciation involves terminating an existing lease agreement.
- A new lease is granted to extend the term or adjust the rent.
- This process can impact tax liabilities and obligations.
- HMRC provides examples to clarify these procedures.
Understanding SDLT in Property Transactions
Background of SDLT
Stamp Duty Land Tax (SDLT) is a tax you pay when you buy property or land in England and Northern Ireland. This tax is calculated based on the purchase price of the property and varies depending on whether you are a first-time buyer or already own property.
What is SDLTM18795?
SDLTM18795 refers to a specific guidance note pertaining to the situation where an existing lease is renounced, and a new lease is granted. This situation often arises when a tenant wants to extend the term of their lease or increase the rent.
Key Concepts with SDLTM18795
1. Renunciation of Existing Lease: This means that the tenant gives up their rights under the current lease. This could be because they want to negotiate better terms or simply because they need a fresh agreement.
2. Grant of New Lease: After renouncing the old lease, a new lease is created. This new agreement may come with different terms, including a longer duration or a higher rent.
3. Increase in Term: Here, the tenant may want to extend how long they can stay in the property. For example, if the initial lease was for five years, they might negotiate a new lease for ten years.
4. Increase in Rent: In this case, the rent cost could be raised. If the old lease had a monthly rent of £800, the new lease might set it at £1,000.
Example Scenario
Consider a business that has been renting a shop under a lease for five years at £800 per month. They feel the rent is low, so they decide to negotiate a new lease at £1,000 per month for a period of ten years.
– Step 1: Renouncing the Old Lease: The tenant formally gives up their old lease that was originally due to expire after five years.
– Step 2: Granting the New Lease: The landlord and tenant agree on new terms, leading to a fresh contract for a term of ten years at the increased rent.
This change triggers potential SDLT implications since the consideration can involve both the increase in term and the increase in rent.
SDLT Calculation Principles
When assessing SDLT for property transactions like the above, the following principles are observed:
– Consideration: Generally, this is the total amount payable for the property, including direct money paid and any amount the buyer assumes or pays on behalf of the seller.
– Rate of Tax: SDLT is charged in bands, which means different portions of the price attract different rates. For example, if you are buying a property for £250,000, you only pay the higher rate on the amount above a certain threshold.
– Long Leases: If you’re granting a new lease for more than seven years, then the consideration must also account for the net present value of the rent over that term.
Further SDLT Considerations
1. Lease Length: The new lease length plays a significant role. If the new lease term is longer than the old lease, this could mean a higher SDLT due to increased present value of rent.
2. Rent Changes: Increases in rent from the previous lease contribute to the total consideration, raising the SDLT.
3. Non-Residential vs Residential: SDLT applies differently based on whether the property is residential or non-residential. Usually, the bandings for non-residential transactions are different than residential ones.
Common Questions About SDLTM18795
1. Do I need to pay SDLT every time I renounce and re-sign a lease?
– Not always. SDLT considerations depend on the new lease’s terms, especially the duration and any changes to rent.
2. What happens if the new rent is less than the old rent?
– If the new rent is lower, this could still trigger SDLT, focusing on the lease term and rental value over time.
3. Are there penalties for not paying SDLT?
– Yes, failing to pay SDLT can result in fines and interest on overdue amounts, so it’s essential to be diligent about submissions.
Examples of Potential SDLT Calculations
Let’s break down some hypothetical scenarios involving SDLTM18795.
Example 1: New Lease with Increased Term and Rent
– Existing lease: 5 years at £800/month
– New lease: 10 years at £1,200/month
– Calculation:
– Old total rent over five years = £800 x 60 = £48,000
– New total rent over ten years = £1,200 x 120 = £144,000
The SDLT will calculate based on the increased present value due to both increased rent and the lease extension.
Example 2: New Lease with the Same Term and Different Rent
– Existing lease: 5 years at £1,000/month
– New lease: 5 years at £1,500/month
– Calculation:
– Old total rent = £1,000 x 60 = £60,000
– New total rent = £1,500 x 60 = £90,000
The SDLT would consider the increased rent amount despite the lease duration remaining the same.
Final Considerations on SDLTM18795 Guidance
Understanding SDLTM18795 is essential when dealing with property transactions that involve changes to lease agreements. It is wise to consult with a professional or refer to official HMRC guidance to discern your SDLT obligations accurately.
For example, if you face a scenario like SDLTM18795 regarding lease changes, seek professional advice to navigate your options effectively.
Useful Resources
For more detailed guidance on SDLT and property transactions, being aware of the HMRC website and resources can help you find additional information relevant to your specific situation.
For SDLTM18795, you can check more details here: SDLTM18795 – Term of a lease: Renunciation of existing lease and grant of new lease to increase the term and/or increase the rent: Example 3
Being informed about how SDLT works and what principles apply can save you both time and money when engaging in property transactions, whether as a buyer or tenant.
Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM18795 – Term of a lease: Renunciation of existing lease and grant of new lease to increase the term and/or increase the rent: Example 3
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